How to Buy Mutual Funds for Children

Many parents want to invest money for their children's futures that will earn good interest. Mutual funds often earn a higher interest rate than certificates of deposit (CD) or other savings accounts, although they carry a slightly higher risk. Mutual funds are an investment option where money is pooled from different investors in order to purchase securities. A fund manager makes decisions as to how the money is invested. A diversified mutual fund can be a good place to put money for a child's college fund or nest egg. Learn how to buy mutual funds for children.

Steps

For many parents, they are saving for college, but for others, it may be for travel, medical expenses or living expenses.
2
Calculate the amount of time you plan to invest the money before your child needs it. If your child is very young and will not need the money for 20 years, you will want to choose different investments than if the child needs it in 5 years.
- You may be able to choose a target-date mutual fund. These investment vehicles allow you to name the year you will need the money. Only a few dozen investment firms offer this, so you will have to look specifically for this type of mutual fund.
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Consider other types of investments for children, as well as mutual funds. Mutual funds often have attractive dividends; however, other investments may have tax advantages.
- If your child is college-bound, you may prefer a 529 college-savings plan. The interest from these plans is not taxed by the IRS. The options depend upon the state you live in, because some states allow you to choose a prepaid plan where you can buy tuition credits with today's rates. All states give a second option, the savings 529 plan. These plans usually rely on mutual funds.
- If your child is already working, they can start saving for retirement with a Roth IRA. They can make contributions to the IRA depending upon the money they earn. This money must be used for retirement if you want to get the tax benefits. There are penalties for early withdrawal.
Since a child cannot open an investment account on their own until they are 18, you will need to open it with both your names on the account. You may choose to do this at your own investment firm, in order to have ease of use and an investment broker you trust.
This money may be in the mutual fund for a long period of time, so you should be sure that the company has a long term plan with excellent management. Spend plenty of time researching investment companies in your area, and you may see the benefit with your own investments as well.
Each investor in a mutual fund pays a fee to take part in the investment. If these fees are large, they can add up over a long period of time, so compare using this metric as well as its past history.
Diversified mutual funds carry less risk, because they put money in many different types of securities. If 1 type of security falls, another is likely to compensate.
Diversified mutual funds are secure enough to allow a hands-off approach. Talk with your broker about this aspect of different options.
Gift a lump sum to your child for use with this initial investment. Unless you have decided upon a Roth IRA, you can use this initial amount to start the investment and add money to it in other lump sums in the future.
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Teach children about their mutual fund when they are old enough to understand. By around age 10, children can start being put in charge of their own savings accounts, with supervision.
- The money site, The Mint, has an excellent article for younger readers on this topic. View it at themint.org/kids/mutual-funds.html
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Question
What is the lowest amount of money needed for a gift mutual fund?
Donagan
Top Answerer
Each mutual fund company imposes its own rules regarding minimum deposits. Contact any mutual fund online, by phone or by mail, and ask what the minimum requirements are. Some are less than $1,000; most are more than that.
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Question
What kinds of people can get mutual funds?
Donagan
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There are no restrictions. Everyone can own mutual fund shares.
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Question
Can I start a Roth IRA for my 13-year-old boy? He has no earned income.
Donagan
Top Answerer
No. All contributions to an IRA must be from income earned by the owner of the account (your son). Instead, open a mutual fund account in your own name as well as that of your son. Any fund company can help you get started.
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